Common Well being Providers: A Purchase For The Coming Silver Tsunami (NYSE:UHS)
When most traders consider the healthcare sector, massive pharmaceutical corporations, reminiscent of Pfizer (PFE), or insurance coverage corporations, reminiscent of UnitedHealth Group (UNH), usually come to thoughts. What usually will get ignored, nonetheless, are the healthcare suppliers themselves, who’re really on the front-lines delivering the affected person care. On this article, I am centered on Common Well being Providers (UHS), which is one such healthcare supplier. Its share price nonetheless has not recovered to pre-pandemic ranges, with a 7.9% decline because the begin of the yr. I consider what makes UHS a lovely purchase on the present valuation, so let’s get began.
(Supply: Firm web site)
A Look Into UHS
Common Well being Providers is a Fortune 500 firm and is among the largest healthcare suppliers within the U.S., with greater than 90,00Zero staff. In 2019, UHS generated over $11 billion in income. Via its subsidiaries, the corporate operates 26 acute care hospitals, 328 behavioral well being inpatient services, and 42 outpatient services and ambulatory care facilities in 37 states, Washington D.C., Puerto Rico, and the UK. UHS additionally offers medical insurance plans and manages a community of physicians.
Beginning with the negatives, UHS has seen a decline in acute admissions in its hospitals, as sufferers have delay elective surgical procedures throughout the pandemic. Through the third quarter, acute care hospital admissions have been down by 17.3% YoY, and affected person days decreased by 1.6% YoY. As well as behavioral well being services noticed a 5.6% YoY decline in admissions, and a 3.6% decline in affected person days. Nevertheless, treating COVID-19 sufferers, funds from the CARES Act, and price discount initiatives have helped each the highest and backside line for the corporate. This resulted in Q3’20 income rising by 3.2% YoY, and non-GAAP EPS was $2.88, which compares favorably to $1.99 within the prior yr quarter.
Whereas these are actually unprecedented occasions for healthcare suppliers, with loads of uncertainties, I am inspired by the current announcement of an accelerated timeline for COVID vaccinations to start out earlier than the center of December, with a forecast for herd immunity (70% immunization price) by May of subsequent yr. As such, I see a return to extra predictable outcomes by the second half of subsequent yr. As well as, UHS may additionally see a lift in income subsequent yr stemming from the postponement of elective procedures this yr. In the meantime it seems that the behavioral well being phase is already seeing a restoration, as affected person days have improved since Q2, and within the third quarter, reached 97% of the prior yr quarter’s ranges.
In the long run, I count on UHS to profit from the approaching “silver tsunami” over the subsequent decade. In keeping with the U.S. Census Bureau, the 65+ age group is rising at a quicker price than the final inhabitants, with about 10,00Zero child boomers reaching this age group every single day, and by 2030, over 1 in 5 U.S. residents might be of retirement age. That is anticipated to be a powerful progress driver for healthcare spend. As seen beneath, healthcare spend is projected to develop at a 5.5% CAGR between now and 2028, with it representing over 21% of U.S. GDP by then. I see UHS benefiting from this secular progress in healthcare spend, given its sturdy presence and geographic attain.
(Supply: Facilities for Medicare & Medicaid Providers)
I am inspired by UHS’s sturdy monitor file. Income grew at a 9.0% CAGR over the previous 9.75 years, from $4.9 billion in 2010 to $11.Four billion for the trailing 12 months. Plus, as seen beneath, EPS has greater than tripled over this timeframe, and UHS has made strong progress in decreasing its share depend since 2016, from round 98 million shares to 85 million at current. Whereas share buybacks and dividend funds have been suspended in the intervening time, I do not see any motive for why they cannot proceed after the pandemic ends.
In the meantime, UHS maintains loads of liquidity, with $1.1 billion in cash and $1.45 billion in accessible borrowing underneath its debt services. Plus, it additionally helps that UHS has remained solidly worthwhile all through this yr. As such, I see UHS weathering by the present atmosphere simply effective.
I see UHS as being attractively valued on the present share price of $132.11 and P/E ratio of 12.95. As seen beneath, it’s now buying and selling at one in every of its lowest valuations previously 10 years.
Analysts additionally count on UHS to proceed its trajectory of progress, with round 3.5% EPS progress for this yr and subsequent, and with progress accelerating to 9.2% YoY in 2022, which brings the ahead P/E ratio all the way down to 11.3. UHS presently has a consensus Purchase score (rating of three.9 out of 5). Bank of America ((BA)C) lately raised its price goal for UHS to $140, given the tailwinds from the vaccine, and the outcomes of the presidential election, which is a plus for the continuation of the ACA (Inexpensive Care Act). For apparent causes, UHS is a beneficiary of the ACA, which ends up in extra of its sufferers being coated by insurance coverage.
(Supply: In search of Alpha)
Common Well being Providers has met with near-term uncertainty, because it offers with the consequences of COVID-19. Nevertheless, it has remained solidly worthwhile this yr and maintains loads of liquidity to handle by any near-term difficulties. I am inspired by the current constructive vaccine information, and in the long run, I count on UHS to profit from the sturdy progress within the senior inhabitants and rising healthcare spend.
Plus, the results of the presidential election is a plus for the corporate, because it helps to make sure the continuation of the Inexpensive Care Act, from which UHS is a beneficiary. As famous within the valuation part, I see the shares as being undervalued at current, particularly contemplating the corporate’s sturdy monitor file of each top- and bottom-line progress. Purchase for progress.
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(Supply: F.A.S.T. Graphs)
Disclosure: I/we’ve got no positions in any stocks talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from In search of Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.
Extra disclosure: This text is for informational functions and doesn’t represent as monetary recommendation. Readers are inspired and anticipated to carry out due diligence and draw their very own conclusions prior to creating any funding selections.